Starwood European Real Estate Finance (SWEF) has released its annual results or the year ended 31 December 2022. This was the last year of account for which SWEF was not in realisation mode as, post period end, shareholders approved a new investment objective and policy that will see an orderly realisation of the fund’s portfolio, with a return of capital to shareholders, which will ultimately lead to the wind up of the trust. Key highlights from the year are as follows:
- Strong cash generation – the portfolio as a whole continues to support targeted annual dividend payments of 5.5 pence per Ordinary Share, paid quarterly. A dividend of 5.5 per pence per Ordinary Share represents a 6.2 per cent dividend yield on the share price as at 31 December 2022
- Additional dividend – an additional dividend of 2.0 pence per Ordinary Share has been declared post period end in respect of the 2022 earnings period, leading to a total declared distribution of 7.5 pence per Ordinary Share for the year
- Income stability – all loan interest and scheduled amortisation payments paid in full and on time
- 79 per cent of the portfolio is contracted at floating interest rates (with floors) which benefits the Group in the current rising interest rate environment
- Portfolio remains robust – despite the economic disruption and uncertainty experienced in 2022, the portfolio continues to perform fully in line with expectations
- Borrowers remain adequately capitalised and are expected to continue to pay loan interest and capital repayments in line with contractual obligations
- Further strategic progress – in 2022, the Group committed a total of £66 million to two new loans, located in the United Kingdom and Europe, in the office, industrial and industrial estates sectors
- 51 per cent – share price total return since IPO in December 2012 (excludes additional dividend of 2.0 pence for 2022 announced on 23 March 2023)
- Portfolio remains fully invested
Comments from John Whittle, SWEF’s chairman
“The twelve months ended 31 December 2022 represented another highly successful year for the Group in an extraordinary year that severely tested many investment strategies. Despite extremely challenging, volatile and uncertain economic conditions, once again the Group demonstrated resilient and consistent performance. Crucially, once again all loan interest and scheduled amortisation payments continue to be paid in full and on time. This is due to the rigorous underwriting and diligent portfolio management that have defined the Group’s existence since 2012. Meanwhile, underlying collateral valuations continue to provide reassuring headroom. It is equally notable that while resilience is an attractive feature, the portfolio has also been able to grow its earnings in current market conditions, delivering a 7.8 per cent annualised and unlevered portfolio return from the Group’s 78.9 per cent floating rate loans positions, covering the target dividend 1.24 times.”
Manager’s portfolio overview
“The portfolio continues to perform in line with expectations. All interest and scheduled amortisation has been paid in line with contractual obligations. Borrowers are also continuing to make progress on underwritten business plans including executing strategic asset sales and paying down the loans.
“During 2022, a total of £56.9 million was repaid. The majority of these repayments were related to strategic underlying property sales executed by borrowers in line with business plan and typically following the completion of underwritten asset management initiatives, with the remainder representing regular scheduled loan amortisation or borrowers electing to voluntarily pay down loan balances with surplus cash.
“The Group’s exposure to development and heavy refurbishment projects continues to decrease as current developments reach completion. As at 31 December 2022, £63 million or 13 per cent of total loan commitments represented loans funding two construction projects. Both of these projects are expected to have reached substantial completion during the first quarter of 2023. The larger of these projects (with a total Group loan commitment of £49 million) has pre-sold the majority of its residential for-sale product and we are forecasting the loan to be fully repaid during 2023 from the proceeds of pre-sold unit completions.
“The Group continues to closely monitor all of its loan exposures. Asset classes representing more than 10 per cent of total investments include Hospitality (39 per cent), Office (21 per cent), Retail (11 per cent) and Residential (11 per cent). The Hospitality exposure is diversified across seven different loan investments. Hotel performance on the trading hotel assets has continued to improve and recover from the pandemic very well during 2022. Despite the potential that trading may be impacted from lower discretionary consumer spending related to inflationary pressures, the Group’s borrowers on trading assets such as hotels have generally indicated a positive end to 2022 and the outlook for 2023 is cautiously optimistic based on forward sales activity as at year end. Office exposure (21 per cent) is spread across eight loan investments. Occupancy across the leased office portfolio has held up well, with the vast majority of the underlying tenants renewing leases and staying in occupation. We also continue to see prospective new tenants being attracted particularly to newly refurbished, high quality buildings. The Retail exposure (11 per cent) has continued to perform in line with expectations; occupancy continues to remain robust and footfall continues its post pandemic recovery. Our retail loan borrowers continue their active asset management and are signing new leases where tenants wish to expand and renew existing leases. Residential exposure (11 per cent) is predominantly related to the successfully pre-sold residential for sale development project that is due to complete during the first half of 2023, with the loan projected to be fully repaid in 2023. In general, market outlook for residential product remains high as rents have trended upwards with inflation over the prior year and many markets remain supply challenged.
“Across all loans we continue to benefit from material headroom in underlying collateral value against the loan basis, with a current weighted average LTV of 58.6 per cent across the portfolio. These metrics are based on independent third-party appraisals which are typically updated annually for income producing assets and following completion on newly constructed or refurbished assets. While the average age of valuations is just over one year for income producing assets and we recognise that interest rate increases within the last twelve months are expected to place downward pressure on valuation inputs, we are confident in the very significant buffer to absorb any negative valuation impact of the current market. On loans where new valuations were instructed in the second half of 2022, average values did not change materially as in many cases increased rents and asset management initiatives being achieved by sponsors outweighed or offset any increase in discount or capitalisation rates.”